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Audit evidence
(Issued March 1995)
Contents
Paragraphs
Introduction 13
Sufficient appropriate audit evidence 47
Tests of control 89
Substantive procedures 1018
Procedures for obtaining audit evidence 1925
Compliance with International Standards on Auditing 26
Effective date 27
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Audit evidence
Statements of Auditing Standards (SASs) are to be read in the light of The scope and
authority of APB pronouncements. In particular, they contain basic principles and
essential procedures (Auditing Standards), indicated by paragraphs in bold type,
with which auditors are required to comply in the conduct of any audit. SASs also
include explanatory and other material which is designed to assist auditors in
interpreting and applying Auditing Standards. The definitions in the Glossary of terms
are to be applied in the interpretation of SASs.
Introduction
1 The purpose of this SAS is to establish standards and provide guidance on the
quantity and quality (or reliability) of evidence to be obtained by auditors, and the
procedures for obtaining that evidence.
2 Auditors should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion. (SAS 400.1)
3 Audit evidence is obtained in a number of ways, including from an appropriate mix
of tests of control and substantive procedures. In some circumstances, evidence may
be obtained entirely from substantive procedures and enquiries made to ascertain
the adequacy of the accounting system as a basis for the preparation of the nancial
statements.
Sufficient appropriate audit evidence
4 Sufciency and appropriateness are interrelated and apply to audit evidence
obtained from both tests of control and substantive procedures. Sufciency is the
measure of the quantity of audit evidence; appropriateness is the measure of the
quality or reliability of audit evidence and its relevance to a particular assertion.
Usually, audit evidence is persuasive rather than conclusive, and auditors therefore
often seek audit evidence from different sources or of a different nature to support
the same assertion.
5 Auditors seek to provide reasonable, not absolute, assurance that the nancial
statements are free from material misstatement. In forming their audit opinion,
therefore, auditors do not normally examine all of the information available.
Appropriate conclusions can be reached about a nancial statement assertion using
a variety of means of obtaining evidence, including sampling.
6 The auditors judgment as to what is sufcient appropriate audit evidence is
inuenced by such factors as:
the assessment of the nature and degree of risk of misstatement at both the
nancial statement level and the account balance or class of transactions
level;
the nature of the accounting and internal control systems, including the control
environment;
173
the materiality of the item being examined;
the experience gained during previous audits and the auditors knowledge of
the business and industry;
the ndings from audit procedures, and from any audit work carried out in the
course of preparing the nancial statements, including indications of fraud or
error; and
the source and reliability of information available.
7 If unable to obtain sufcient appropriate audit evidence, auditors consider the
implications for their report.
Tests of control
8 In seeking to obtain audit evidence from tests of control, auditors should consider
the sufficiency and appropriateness of the audit evidence to support the assessed
level of control risk. (SAS 400.2)
9 The aspects of the relevant parts of accounting and internal control systems about
which auditors seek to obtain audit evidence are:
(a) design: the accounting and internal control systems are capable of preventing or
detecting material misstatements; and
(b) operation: the systems exist and have operated effectively throughout the
relevant period.
Substantive procedures
10 In seeking to obtain audit evidence from substantive procedures, auditors should
consider the extent to which that evidence together with any evidence from tests of
controls supports the relevant financial statement assertions. (SAS 400.3)
11 Financial statement assertions are the representations of the directors that are
embodied in the nancial statements. By approving the nancial statements, the
directors are making representations about the information therein. These repre-
sentations or assertions may be described in general terms in a number of ways, one
of which is as follows:
(a) existence: an asset or a liability exists at a given date;
(b) rights and obligations: an asset or a liability pertains to the entity at a given
date;
(c) occurrence: a transaction or event took place which pertains to the entity during
the relevant period;
(d) completeness: there are no unrecorded assets, liabilities, transactions or events,
or undisclosed items;
(e) valuation: an asset or liability is recorded at an appropriate carrying value;
(f) measurement: a transaction or event is recorded at the proper amount and
revenue or expense is allocated to the proper period; and
(g) presentation and disclosure: an item is disclosed, classied and described in
accordance with the applicable reporting framework (for example relevant
legislation and applicable accounting standards).
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APB Statements of Auditing Standards
12 Audit evidence is usually obtained to support each nancial statement assertion.
Audit evidence regarding one assertion (for example, existence of stock) does not
compensate for failure to obtain audit evidence regarding another (for example, its
valuation). Tests may, however, provide audit evidence about more than one
assertion (for example, testing subsequent receipts from debtors may provide some
audit evidence regarding both their existence and valuation).
13 Programmes of detailed audit procedures are sometimes drawn up by auditors by
reference to audit objectives. Such objectives may provide a satisfactory way of
enabling auditors to satisfy themselves that the planned work will result in appro-
priate evidence being obtained, provided that the objectives cover all the relevant
nancial statement assertions made by the directors.
14 The nature, timing and extent of substantive procedures depends, amongst other
factors, on the auditors assessments of the control environment and accounting
systems generally and of the inherent and control risks relating to each assertion, as
well as on any evidence obtained from audit work performed during the preparation
of the nancial statements. In particular, where tests of control provide satisfactory
evidence as to the effectiveness of accounting and internal control systems, the
extent of relevant substantive procedures may be reduced, but not entirely elimi-
nated.
15 Substantive procedures may be incorporated within other procedures. For example,
tests of control may be designed as dual purpose tests to provide evidence of a
substantive nature, and such evidence may also be obtained as part of the work
carried out to make preliminary assessments of risks of error.
16 The reliability of audit evidence is inuenced by its source: internal or external, and
by its nature: visual, documentary or oral. While the reliability of audit evidence is
dependent on individual circumstance, the following generalisations may help in
assessing that reliability:
audit evidence from external sources (for example conrmation received from
a third party) is more reliable than that obtained from the entitys records;
audit evidence obtained from the entitys records is more reliable when the
related accounting and internal control system operates effectively;
evidence obtained directly by auditors is more reliable than that obtained by or
from the entity;
evidence in the form of documents and written representations is more reliable
than oral representations; and
original documents are more reliable than photocopies, telexes or facsimiles.
17 Audit evidence is more persuasive when items of evidence from different sources or
of a different nature are consistent. When audit evidence from one source is
inconsistent with that from another, auditors determine what additional procedures
are necessary to resolve the inconsistency.
18 Auditors consider the relationship between the cost of obtaining audit evidence and
the usefulness of the information obtained. However, the existence of difculty or
expense is not in itself a valid basis for omitting a necessary procedure.
Audit evidence SAS 400
175
Procedures for obtaining audit evidence
19 Auditors obtain audit evidence by one or more of the following procedures:
inspection, observation, enquiry and conrmation, computation and analytical pro-
cedures. The choice of such procedures is dependent, in part, upon the periods of
time during which the audit evidence sought is available and the form in which the
accounting records are maintained.
Inspection
20 Inspection consists of examining records, documents or tangible assets. Inspection of
records and documents provides audit evidence of varying degrees of reliability
depending on their nature and source and the effectiveness of internal controls over
their processing. Three major categories of documentary audit evidence, listed in
descending degree of reliability as audit evidence, are evidence:
(a) created and provided to auditors by third parties;
(b) created by third parties and held by the entity; and
(c) created and held by the entity.
Inspection of tangible assets provides reliable audit evidence about their existence
but not necessarily as to their ownership or value.
Observation
21 Observation consists of looking at a process or procedure being performed by
others, for example the observation by auditors of the counting of stock by the
entitys staff or the performance of internal control procedures, in particular those
that leave no audit trail.
Enquiry and confirmation
22 Enquiry consists of seeking information of knowledgeable persons inside or outside
the entity. Enquiries may range from formal written enquiries addressed to third
parties to informal oral enquiries addressed to persons inside the entity. Responses
to enquiries may provide auditors with information not previously possessed or with
corroborative audit evidence.
23 Conrmation consists of the response to an enquiry to corroborate information
contained in the accounting records. For example, auditors may seek direct con-
rmation of debts by communication with debtors.
Computation
24 Computation consists of checking the arithmetical accuracy of source documents
and accounting records or performing independent calculations.
Analytical procedures
25 Analytical procedures consist of the analysis of relationships between items of
nancial data, or between items of nancial and non-nancial data, deriving from
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APB Statements of Auditing Standards
the same period, or between comparable nancial information deriving from differ-
ent periods or different entities, to identify consistencies and predicted patterns or
signicant uctuations and unexpected relationships, and the results of investiga-
tions thereof.
Compliance with International Standards on Auditing
26 Compliance with this SAS ensures compliance in all material respects with Inter-
national Standard on Auditing 500 Audit Evidence.
Effective date
27 Auditors are required to comply with the Auditing Standards contained in this SAS
in respect of audits of nancial statements for periods ending on or after 23
December 1995.
Audit evidence SAS 400
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